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Outsourcing And Insourcing

Given the extent of globalization, the available technology, and the ease of creating virtual teams, new outsourcing and insourcing solutions have been created over the past several decades. Outsourcing and insourcing work is not simply sending it out or bringing it back into an organization. It is a set of activities that determine where and how work should be done, and by whom and under what conditions to increase its value-add content. The concept of what an organization “is” and “does” is under constant review. Outsourcing and insourcing have grown to more than the sum of the work being moved around the world. As an example, a manufacturer might insource some work activities that reduce the order-to-cash lead time to gain sales or reduce cost. Or perhaps it needs to increase customer satisfaction and revenue by expanding current product and service offerings by purchasing from competitors. These decisions are made from an end-to-end supply chain perspective to add value for all participants Table 13.11 lists reasons why organizations outsource or insource work. Outsourcing work to increase capacity is a major benefit. Insourcing is sometimes needed to utilize in-house capacity more effectively. Organizations should be careful to insource only value-add work aligned with a core competency. Insourcing extraneous work into a process that is not designed for it causes operational inefficiencies. A classic example is when high and low technology is mixed, with the result that quality problems occur in the high technology operations and high unit costs occur in the lower technology operations. The result is overpriced or




1.Increase Capacity

Expand current labor and equipment capacity at low cost and risk.

Increase utilization of current capacity using labor and equipment having similar skills and capabilities as insourced work.

2. Obtain New Technology

Avoid the cost and risks of developing new technologies especial those which are not aligned with core technology.

Purchase or license new technology which is been fully developed by another organization to reduce cost and lead-time and ensure quality targets are met.

3. Reduce Financial And Market Risks

Allocate financial resources to core processes and current marketing activities.

Bring in work which external organizations cannot do at the cost, lead-time and quality levels required.

4. Reduce Supply Chain Lead Time

Move supply activities closer to markets to reduce lead-time and


Bring in work that reduces supply chain lead time. Don’t send work across the supply chain unless it is virtualized.

5. Focus On Core Processes

Outsource non-core processes to focus organizational resources on core activities important to drive sales growth.

Outsource non-core processes and insource core process work to improve volume efficiencies.

6. Expand Into New Markets

Partner with organizations in other markets to expand market share, reduce risk and cost.

Bring in work that is not currently done but uses common labor skills and equipment.

7. Improve Operational Efficiency And Reduce Cost

Work with external organizations which have a competitive labor or capital cost advantage.

Bring in work that increases increase volume and level load schedules.

8. Satisfy Country Rules, Regulations And Laws

Work with organizations having a favored regulatory position within their country such as licenses or permits.

Bring in work that cannot not be outsourced due to country rules, regulations and laws.

9. Obtain Cultural Expertise Relative To Market Segmentation.

Work with organizations to obtain design and marketing expertise relative to cultural norms and behavior

Bring in design and marketing experts from other countries to create new products and markets.





Work with organizations to deploy challenging operations which can only de done in certain regions of the world i.e. dry, wet, hot, or cold.

Bring in work which requires special handling equipment or skills.

underperforming products or services. The historical solution is to separate processes supporting different technologies unless they can be efficiently combined to maintain efficiencies regardless of the work being done. If insourced work reinforces core competencies and is properly integrated, there should not be process issues.

A second reason for outsourcing or insourcing work is to obtain new and unique technology. When outsourcing work, it might be more efficient to let other organizations that have advanced technology do portions of the work that your organization cannot or will not do. But proper contractual and other controls need to be in place to ensure the technology remains available, performance and costs are stable, and it cannot be used without permission. For insourcing, organizations can license technology from other organizations with similar assumptions. Minimizing financial risk or obtaining scarce materials are other benefits. The remainder of benefits include increasing operational synergies; reducing order-to-cash lead times in the supply chain; moving work closer to its markets to reduce lead time and cost; aligning resources to processes that are strategically important to drive sales growth, improve volume efficiencies, and expand into new markets; satisfying local country rules, regulations and laws; working with organizations that have a favored regulatory position such as licenses or permits; obtaining cultural expertise; accessing design and marketing expertise; or deploying challenging operations that can only be done in certain regions of the world. These include work that must be done under dry, wet, hot, or cold conditions or requires special handling equipment or skills.

Table 13.12 shows strategies used to create new relationships for outsourcing or insourcing work across a supply chain. These apply to the management of both intangible and tangible assets such as fixed assets, facilities and equipment, information, product, services, and people. These span a range of options from the outright sale of a business or process to the licensing of new technology and methods for sharing information. Regardless of the supply chain participant relationships, it is important that evaluations of outsourcing and insourcing are made using predetermined decision criteria and a risk analysis.

Table 13.13 provides key criteria that can help evaluate the feasibility for outsourcing or insourcing between organizations and locations. This list can be expanded or reduced depending on needs. In addition to ranking the relative importance of each evaluative factor, the methods necessary

TABLE 13.12

Outsourcing and Insourcing Scenarios


Intangible Assets & Intellectual Property

Fixed Assets & Facilities



Sale of Core Business

Sales Non-Core Business

Joint Venture




Share Information

Share Resources





Almost anything can be outsourced or insourced

to collect and analyze data for each criterion should be established and a model built for each combination of criterion levels to evaluate decisions.

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